Taxability of Composite Rent, Unrealised Rent, and Arrears of Rent

House Property consists of any building and land attached to that building. The land may be in the form of a courtyard or compound or parking, as part of the building. Any income generated from such House Property shall be taxable under the head Income from House Property. It will be taxable under the hands of the legal owner of the property. This article covers the treatment of composite rent, arrears of rent, and tax treatment when unrealized rent is subsequently realized. Considering Section 22 of the Income Tax Act, the following are the conditions to satisfy to tax any income under the head “Income from house property”:

  • There should be a property consisting of a building or land appurtenant thereto.
  • The assessee should own the property
  • The property should not be used by the owner of the property for the purpose of his business or profession, the profit of which is chargeable to income-tax

Composite Rent

Meaning of composite rent

Rent received for a house as well as for facilities provided with the house like lift, gas, water, electricity, etc. the total amount so received is called ‘composite rent‘. Where the assessee receives composite rent from its tenant towards the building as well as services/amenities, such rent should be split up.
Example: Provision of fully furnished house on rent having furniture and AC

Taxability of composite rent

  • The only portion of rent attributable to the house is taxable as “Income from House Property”
  • The portion attributable to facilities is taxable as Income from Other Sources.
  • When composite rent consists of rent for building and rent for other assets (Like furniture) and the two rents are:
    • Inseparable: Then such income is taxable as business income or income from other sources
    • Separable: Then the rent of building is taxable as Income from house property and rent of other assets is taxable as Income from other sources.
ITR for Multiple House Properties
CA Assisted Income Tax Return filing for Individuals and HUFs having multiple house property income, multiple salaries and income from other sources.
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ITR for Multiple House Properties
CA Assisted Income Tax Return filing for Individuals and HUFs having multiple house property income, multiple salaries and income from other sources.
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Unrealised Rent

Meaning of unrealised rent

  • It is the rent of the property pertaining to the previous year, which the owner of the property could not recover from the tenant. It is subsequently realized from a tenant
  • To be able to deduct unrealized rent from your rental income, there are four conditions:
    • The tenancy is bonafide
    • The defaulting tenant has vacated or steps have been taken to compel him to vacate the property
    • The defaulting tenant is not in occupation of any other property of the assessee and
    • The assessee has taken all the reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.
  • Unrealized rent will not be allowed as a deduction from your actual rent received or receivable if the conditions are not falling under the above-mentioned four conditions.

Taxability of unrealised rent

  • It shall be deemed to be the “Income from House Property” in respect of the financial year in which such rent is received or realized
  • Amount to the extent it has not been included in the annual value earlier will be charged to tax. Further, 30% of such rent shall be allowed as a deduction
  • It will be taxable even if the house is not owned by you in the year of recovery/receipt of unrealized rent

Arrears of Rent

Any amount received as arrears of rent, not charged to income-tax for any PY (earlier years), then amounts so received after allowing deduction of 30% of such amount, will be taxable under the head “Income from House Property”. Further, arrears of rent shall be chargeable to tax in the previous year in which it is received. Whether the property is owned by the assessee in the year of receipt or not.

Computation of Income From a Let out Property

Manner of computation of income from house property in case of a Let-out property :

Gross annual value (*)   XXXX
Less.- Municipal taxes paid during the year   XXXX
Net Annual Value (NAV)   XXXX
Less.- Deduction under section 24    
Deduction under section 24(a) @ 30% of NAV XXX  
Interest on borrowed capital under section 24(b) XXX XXXX
Income from house property   XXXX

(*) Gross annual value is determined in following three steps:

  1. Compute reasonable expected rent of the property (Note 1).
  2. Calculate the actual rent of the property (Note 2).
  3. Compute gross annual value (Note 3).

Rent pertaining to the vacancy period is to be deducted from the amount derived at step 3

Note 1: Reasonable expected rent will be higher of the following :

  1. Municipal value of the property; or
  2. Fair rent of the property.

In the case of a property covered under the Rent Control Act, reasonable expected rent will be higher of the municipal value or fair rent subject to the standard rent of the property.

Note 2: It is the actual annual rent of is let-out property during the previous year. While computing actual rent, rent pertaining to the vacancy period or unrealized rent is not to be deducted.

Note 3: Gross annual value will be higher of the amount computed at step 1 or step 2 above.

FAQ

Can rental income on a property be taxed in the hands of a person who is not a registered owner of the property?

The income or receipt can be taxed as ‘Income from House Property’ only when you own the property and you are entitled to legally receive income from such property.

How do I compute income from a property which is self-occupied for part of the year and let out for part of the year?

Such a property will be treated as been let-out throughout the year and income will be computed accordingly. However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period.

How is standard rent calculated?

Standard rent means the rent which is calculated and prescribed by competent authority.

What if fair value of a property cannot be determined?

Fair value means market value of the property. So if the fair value is not available or cannot be ascertained, fair market value of  similar property in the same location shall be taken as the fair value of the property in question.

Got Questions? Ask Away!

  1. Hi @Dixita

    Amount received as arrears of rent after allowing deduction of 30% of such amount, will be taxable under the head “Income from House Property”. Provided, , the amount should not be charged to income-tax for any PY (earlier years).
    Further, arrears of rent shall be chargeable to tax in the previous year in which it is received. Whether the property is owned by the assessee in the year of receipt or not.
    So the amount that you received shall be chargeable to tax for the FY 2020-21under the head income from house property.
    Hope this helps

  2. Hi @Izzah ,

    Unrealised rent can be deducted from actual rental income subject to fulfilment of following conditions:

    • The tenancy is bonafide
    • The defaulting tenant has vacated or steps have been taken to compel him to vacate the property
    • The defaulting tenant is not in occupation of any other property of the assessee and
    • The assessee has taken all the reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

    If all the conditions are satisfied, then only you can subtract the unrealised rent from actual rental income.

    Hope it helps!

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